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Most Advisors Using Alternative Investments, Study Finds

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New research has found that 78% of all advisors are using alternative investments within client portfolios, Cogent Research said Tuesday, mainly for diversification and with some variation related to channel differences and other factors.

The main reasons for using alternatives are to further diversify portfolios (83%), manage risk (80%) and to achieve absolute returns (54%). Far fewer advisors report using alternatives in an effort to deliver returns above a benchmark (20%) or for tax-management purposes (19%).

These findings were included in “2011 Advisor Brandscape,” based on surveys of 1,643 retail investment advisors. This is the first time the report included a section on advisors’ usage and attitudes regarding alternatives.

Advisors now allocate an average of 11% of their book to alternatives, spread across a variety of products, Cogent says.

Independent advisors, the heaviest overall users of alternatives, show the strongest preference for venture capital, private equity and hedge funds. Bank advisors have a greater appetite for limited partnerships, and RIAs tend to use structured products/notes.

“It was somewhat surprising to us to see such broad and consistent use of alternatives, not only across channels, but also based on assets under management,” said John Meunier, Cogent principal and author of the report, in a press release. “Clearly, advisors of all stripes and tenure have embraced the notion that managing client portfolios in today’s environment requires the tools to provide greater asset-class diversification and better risk management strategies.”

Among the 22% of advisors not currently using alternatives, almost half (47%) admit that their own lack of lack of knowledge is holding them back.

Meanwhile, 52% of those now employing alternative-investment products say that a lack of client knowledge and sophistication is preventing them from embracing alternatives further.

Alternative Products

Among eight types of investment vehicles, advisors say they are least likely to access alternative asset classes and strategies through mutual funds and ETFs. However, over the next year, more advisors expect to increase their use of alternatives and ETFs than any other product or vehicles.

The study found that 41% of advisors now using alternatives believe they will increase their use of ETFs and 28% will increase their use of mutual funds to access alternatives.

“These figures represent a huge opportunity for mutual fund and ETF providers to satisfy a growing demand among retail advisors for institutional-quality alternative investment strategies that are both scalable within their practices and palatable to skeptical investors,” said Meunier.

“However, as they roll out new products or broaden distribution of existing offerings, providers must not overlook the importance of providing the support and education that will be required to promote acceptance,” he explained.


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